Argentina's dilemma with hedge fund debt

Some creditors want repayment on original terms

Associated Press

Published 7:41 pm, Monday, June 23, 2014

Photo: Eduardo Di Baia

Image 1of/2

Caption

Close

Image 1 of 2

FILE - In this June 17, 2014 file photo, Argentina's Economy MInister Axel Kicillof talks to the media during a news conference to explain the recent U.S. Supreme Court's ruling on Argentina's bond default and discuss how the government plans to proceed, in Buenos Aires, Argentina. For over a decade, Argentina avoided paying $1.5 billion it owed to U.S. hedge funds for defaulted bonds. But after the U.S. Supreme Court refused to intervene in the case this week, the country must pay up by the end of this month. (AP Photo/Eduardo Di Baia, File) ORG XMIT: NYBZ227 less

FILE - In this June 17, 2014 file photo, Argentina's Economy MInister Axel Kicillof talks to the media during a news conference to explain the recent U.S. Supreme Court's ruling on Argentina's bond default and ... more

Photo: Eduardo Di Baia

Image 2 of 2

FILE - In this May 25, 2014 file photo, Argentinas President Cristina Fernandez talks to crowds assembled at Plaza de Mayo to celebrate the May 25 Holiday in Buenos Aires, Argentina. (AP Photo/Natacha Pisarenko, File) ORG XMIT: NYBZ228 less

FILE - In this May 25, 2014 file photo, Argentinas President Cristina Fernandez talks to crowds assembled at Plaza de Mayo to celebrate the May 25 Holiday in Buenos Aires, Argentina. (AP Photo/Natacha ... more

Photo: Natacha Pisarenko

Argentina's dilemma with hedge fund debt

1 / 2

Back to Gallery

New York

Argentina's 13-year fight with creditors erupted in U.S. courts last week, and the results were messy.

Argentina had asked the U.S. Supreme Court to overturn a lower court's ruling that it must pay $1.5 billion to hedge funds that own bonds the country had defaulted on back in 2001. The Supreme Court refused to hear its appeal — a victory for the hedge fund investors.

Cristina Fernandez, Argentina's president, had said it couldn't afford to pay off the hedge funds while also making regular interest payments to other lenders. Last week, signs of a possible resolution emerged. Fernandez said she will seek a U.S. judge's support for resolving all of Argentina's unpaid debts in one grand bargain.

The time for a resolution is running out. Argentina has to make an interest payment to its other bond holders on June 30. The U.S. court said that if Argentina made those interest payments, it also had to give the plaintiffs their due. If Argentina refuses to comply, the ruling bars U.S. banks from handling the government's debt payments.

One misstep and Argentina could slide toward another default, an event likely to spread trouble beyond its shores.

More Information

Just how did Argentina wind up in this mess? Here are some questions and answers:

Q: What happened after the Supreme Court turned Argentina down?

A: A lot. The Supreme Court also decided to let bondholders subpoena banks in U.S. courts to track down Argentina's assets abroad. The decisions drove the country's Merval stock index down 11 percent last Monday.

The next day, the rating agency Standard & Poor's cut Argentina's rating further into junk territory — to CCC-, S&P's lowest grade for any country.

For most countries, the rating agency's move would be a harsh blow. It would inflate borrowing costs and make it harder to finance budgets. But Argentina's troubles are so well-known that the downgrade came as little surprise. Argentina hasn't borrowed from the bond markets since its default in 2001.

Q: Who are the players?

A: In one corner, Argentina's government. In the other, a group of investors led by NML Capital, a subsidiary of Elliot Capital Management, run by billionaire Paul Singer. Singer, a lawyer by training, has in the past successfully sued the governments of Peru and the Republic of the Congo to make good on their bonds. In this case, NML and other funds bought bonds left from Argentina's default in 2001.

Q: What do they want?

A: When the hedge funds bought the defaulted bonds, they joined the ranks of Argentina's creditors. Now, like lenders everywhere, they want the borrower to repay its debts on the original terms.

The problem is, other creditors had already agreed to cut Argentina a break in 2005 and 2010 by swapping their bonds for new ones worth less. This helped Argentina's government slash its debts.

The bonds acquired by Singer's group were among those left over. In 2012, U.S. District Judge Thomas Griesa in New York ordered Argentina to pay the holdouts. They're now owed $1.5 billion in principal and interest.

Q: Why is a U.S. court telling a foreign government what to do?

A: When a big business goes bust, it winds up in bankruptcy court. Sovereign countries have no dedicated international court to help them strike deals with creditors. So in agreements involving bond sales, language typically stipulates that any legal battle must occur in one of the two biggest financial capitals: New York or London. "That's where the money is," said Anna Gelpern, a professor of international law at Georgetown University.

Q: Why does this matter?

A: One worry is that forcing Argentina to pay the holdouts would set a dangerous precedent. The thinking is that it could encourage bondholders to play tough when struggling countries try to restructure their debts.